Comcast and Charter may need renewed attention as broadband growth stalls

Brian Roberts, CEO of Comcast (left), and Tom Rutledge, CEO of Charter Communications.

Drew Angerer | Getty Images

Comcast as well as Charterthe two largest cable companies in the US are facing broadband growth.

As tens of millions of Americans have canceled their cable TV subscriptions over the past decade, the cable industry has focused on the more lucrative business of selling broadband Internet access.

Now, the number of US households paying Comcast and Charter for high-speed internet access is declining for the first time, and both companies are reporting a decline in residential broadband in the second quarter. Comcast lost 10,000 residential customers and noted that in July it fell another 30,000. Charter dropped 42000.

Comcast CEO Brian Roberts and Charter colleague Tom Rutledge blamed macroeconomic trends and better-than-usual gains during the pandemic as the main reasons for the losses. Comcast specifically cited fewer people moving as the main reason for lower ties.

“There has been a dramatic slowdown in traffic in our region,” Roberts said during a Comcast conference call last month. He noted that in the first year of the pandemic, the company attracted almost 50% more customers than its previous average annual growth.

The sudden end to broadband’s growth streak is a major concern for investors in Comcast and Charter, whose shares are trading near two-year lows. Comcast shares are down about 25% year-to-date and Charter shares are down about 33%.

And while the pandemic and macroeconomic trends may ease over time, Roberts also acknowledged in the earnings report another reason for broadband’s downfall: new competition.

The rise of fixed wireless

For decades, cable companies have enjoyed having little competition in many parts of the country for high-speed Internet access..

Then about three years ago, T Mobile launched its fixed wireless product, 5G high speed broadband product which works as an alternative to cable broadband. If or April, T-Mobile high speed internet available for over 40 million households across the country. Verizon said earlier this year that it plans to have 4 to 5 million fixed wireless networks. customers by the end of 2025.

Roberts was fired in March. fixed wireless as a “bad product”. T Mobile promised half of the country to get speeds of at least 100 megabits per second by the end of 2024. Standard cable (and fiber) broadband access can typically provide about twice the speed. Moreover, fixed wireless connectivity is limited due to the congestion of 5G radio waves. The cable, through which the wires go directly to the house, has no such limitation.

“Before, we saw offers at a lower price and at a lower speed. And in the long term, I don’t know how viable this technology will be,” Roberts said at the conference. Morgan Stanley Conference on Technology, Media and Telecommunications.

T-Mobile charges a flat monthly fee of $50 for their fixed wireless service. New Street Exploration rated The average monthly income from cable broadband per use is almost $70 and is likely to rise to more than $75 by 2025.

Just as T-Mobile grew in the wireless industry by offering lower prices, it looks like it’s doing the same with cable networks. T-Mobile added a whopping 560,000 new fixed wireless customers in the second quarter as Comcast and Charter lost broadband subscribers. T-Mobile said more than a half his new clients switched from cable television.

“Demand continues to grow from dissatisfied cable TV subscribers in the suburbs to underserved customers in smaller markets and rural areas,” T-Mobile CEO Mike Sievert said during a company earnings conference call. T-Mobile also noted that Ookla nationwide speed test results in July, 5G network (187.33 Mbps) outpaced Comcast and Charter Broadband (184.08 and 183.74 respectively) in average speed.

Roberts disputed that customers are abandoning Comcast for any fixed service, arguing that T-Mobile’s growth is based on new customers.

“We don’t see fixed wireless having any measurable impact on our churn,” Roberts said during a July 28 Comcast conference call.

However, if fixed wireless continues to absorb the growth in cable broadband, Comcast and Charter will need to convince investors that there is another reason to invest in cable, said Chris Marangi, portfolio manager at Gabelli Funds.

“There is no obvious catalyst,” Marangi said. “You probably won’t have strong broadband growth in the next six months.”

Gabelli Funds owns Charter, Comcast, Verizon and T-Mobile.

Fear of investing in cable

Cable shareholders fear not only that Comcast and Charter could be at the end of an era when it comes to broadband growth. In addition, new competition will lead to lower prices. The combination of promotional pricing and stalled growth could eventually turn broadband into something more like a wireless business that has been stifled by price wars and low profits for years.

It’s still too early to tell whether fixed wireless will take market share away from cable companies in the coming years, or whether congestion problems will force wireless providers to limit user numbers, said Craig Moffett, telecoms analyst at MoffettNathanson. Moffett noted that fixed wireless uses much more data than mobile wireless, but generates about 20% more revenue based on current prices.

“Time will tell if this move to fixed wireless is just a temporary opportunity,” Moffett said.

It’s possible that fixed wireless is just having a “moment” and over time, customers will abandon the service as either too unreliable or not fast enough, said Walt Pisik, an analyst at LightShed Partners.

“Now it looks like it’s working. They take cable TV subscribers,” Petsik said. “We’ll see if it’s sustainable in two or three quarters.”

The technological advantages of cable television could turn investors back towards Comcast and Charter if fixed wireless growth slows.

“While the narrative of slowing connections ahead of increased competition does not bode well for sentiment, we believe cable’s advantage over much of its territory will boost sub growth,” JP Morgan analyst Philip Cusick wrote in a note to clients.

Cable goes wireless

If television declines and broadband growth slows, the next chapter for cable TV will be wireless, Moffett predicts.

Wireless has become the new growth story for cable television as Comcast and Charter used a joint network agreement with Verizon. to develop their own mobile services. Comcast’s wireless revenue grew 30% year-on-year in the second quarter and more than 80% from two years earlier. Charter’s quarterly wireless network sales are up 40% year-over-year; two years ago, the company didn’t even record wireless revenue because the business was so new.

Comcast and Charter must share wireless with Verizon under the terms of their network agreement, which reduces margins. A well-managed mobile virtual network operator still only has margins of around 10%, according to Moffett. But it could increase over time, he said.

“Wireless may not be a better business than broadband, but it’s a much bigger business,” Moffett said.

Charter COO Chris Winfrey said during a conference call on the company’s second-quarter earnings that the potential of cable wireless communications is underestimated.

Given the move from wireless companies to broadband, and the shift from cable companies to mobile services, some believe a merger between the two industries is inevitable.

“It just doesn’t make any sense not to do it solely because of operational synergies, because of capital allocation synergy, in terms of branding synergy,” Altice CEO Dexter Goei. told CNBC last year. Altice is the fourth largest cable TV provider in the US after Comcast, Charter and Cox.

According to Goei, the more customers receive services from the same provider, the less likely they are to leave.

M&A as a last resort

Merger of Comcast or Charter with T-Mobile, Verizon and AT&T Moffett said this was unrealistic given the US regulators’ stance on market power. However, different presidential administrations may have different views on what is acceptable. For example, Sprint and T-Mobile were able to merge under the Trump administration. after years of government officials telling them not to bother even trying.

“Never say never, right?” Well said. “Strategic transactions, when you have different services, I don’t see why it shouldn’t be something that should be allowed by the antitrust department.”

If a cable/wireless merger isn’t planned, there are other potential ways the deals could renew investor interest.

Regional cable operator WideOpenWest as well as sudden link, an asset owned by Altice USA, is in talks with potential buyers, according to people familiar with the matter. Gabelli’s Marangi said the deal could boost the value of publicly traded cable companies by boosting the company’s valuation multiple.

Charter or Comcast could also buy a non-cable TV asset to draw investors’ attention to their companies.

“This is Management 101. When companies go beyond growth, they turn to M&A,” Pisik of LightShed Partners said.

However, it is also possible that investors will view an outside acquisition as a distraction rather than an opportunity. Shareholders are likely to resist media asset deals, such as Comcast’s past acquisitions of Sky and NBCUniversal, Moffett said.

Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.

WATCH: Comcast announces unchanged broadband subscribers